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Magna Makes Move on GM

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Last month, I explained "How to Profit from a Bankrupt GM" by investing in Canadian auto parts maker Magna International (NYSE: MGA  ) . But while a good way to profit from General Motors' (OTC: GMGMQ.PK) bankruptcy was to buy shares last month, a better way was to wait till today ... Because today, Magna's not only one step closer to becoming a true "car company" -- it's also more than 10% cheaper than it was at the beginning of May when I penned my article.

It's official
The news that began leaking out over the weekend was confirmed this morning: Fiat has given up on buying General Motors' European Opel division, scared off by a new short-term funding requirement Fiat called "unreasonable." In contrast, Magna knows that while Chrysler may have been a gimme, Opel is worth paying for. Magna's willingness to provide bridge financing (about $400 million) as Opel spins off from a now-bankrupt GM convinced the German government to let it acquire the company Saturday.

Details remain obscure, and in fact, Magna tells us it will still be "four or five weeks" before everything is nailed down and September before the deal is consummated. But the broad outlines appear to look as follows: Magna is part of a consortium of three buyers, including itself, Russian national savings bank Sberbank, and Russian automaker GAZ, that will together buy a 55% majority of Opel. General Motors is hanging onto 35% of its former subsidiary, while Opel employees will get the final 10%.

What now?
Now that we know the winner, it's time to address some of the criticisms of Magna's move into auto building. For example, over the weekend, The Wall Street Worrywart (er, Journal) suggested that the several auto majors to whom Magna supplies parts might balk at buying from a competitor.

Balderdash. The automotive world is rife with such cooperation. Magna already builds cars for BMW, and just inked a deal to build electric cars for Ford (NYSE: F  ) . GM buys its Aveo subcompact from Daewoo. GM and Toyota (NYSE: TM  ) actually operate a factory jointly out in California. Toyota licenses hybrid engine technology to Ford and Nissan (Nasdaq: NSANY  ) ... and 'round and 'round we go.

What's more, Magna has proven that in even the worst of economies, it can do what others (take Lear (NYSE: LEA  ) for instance) cannot: Make money from operations. For that matter, its free cash flows are greater than even car-parts-rival BorgWarner (NYSE: BWA  ) .

Foolish takeaway
With its customer base and free cash flow intact, its control of Opel all but certain ... and its share price more than 10% cheaper than last month, Magna's stock looks like potentially a "great" investment.

Fool contributor Rich Smith does not own shares of any company named above. Nor does he own a car, now that his trusty S-10 has finally bit the dust. The Motley Fool has a disclosure policy.

BorgWarner is a Motley Fool Stock Advisor pick. Nissan Motor is a Motley Fool Global Gains selection.

Read/Post Comments (4) | Recommend This Article (11)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 03, 2009, at 5:12 PM, rlhoman wrote:

    I would be more concerned about being controlled by Putin. His record as a partner (see Mechel) does not inspire a great deal of confidence in doing business with the Russian mob,

  • Report this Comment On June 03, 2009, at 5:21 PM, sem5 wrote:

    GM owns Daewoo, they don't buy the Aveo from them, it's just built in Korea.

    I believe Magna will provide EV technology to Ford but the vehicle will be built in a Ford plant.

    Ford pays license fees to Toyota due to similarities in the hybrid system in the Escape. no parts are purchased from Toyota. Nissan uses Toyota-developed parts directly in the Altima Hybrid. different situation.

  • Report this Comment On June 04, 2009, at 8:47 AM, catoismymotor wrote:

    I think the first thing Magna should build and market under their own name should be a zero emissions vehicle. Ideally is should be designed to be pulled by oxen or horses and called the Magna Carta.

  • Report this Comment On June 04, 2009, at 10:00 AM, TMFDitty wrote:

    Cato, I'm going to have to talk to the Foolish techies about letting us authors "rec" the comments. Hilarious!


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